Wednesday, September 18, 2013

From an investor perspective, when purchasing a short sale, one of the biggest concerns of the seller is whether they will owe taxes on the forgiven amount. We represent sellers and we represent buyers and we are buyers. This is the common concern in these situations. Answering this question clearly can mean the difference between a closed transaction or a dead deal.

Teresa Mears at MSN Real Estate wrote last year and described a situation where a homeowner completed a short sale, the lender wrote off $100,000 and the homeowner was stuck with a $20,000 tax bill. This illustration is technically true, but there are a lot more details that must be considered. Her article was written while Congress was discussing whether they would extend the Mortgage Forgiveness Debt Relief Act and Debt Cancellation last year. It was extended till the end of 2013. Now, they’re discussing an additional extension, but whether it will be extended or not is yet to be seen. If it isn't, there are other caveats to consider.

If you purchased a home for $500,000 with 100% financing in 2005 and you short sold the property in 2011 for $400,000, it is true that the lender could give you a 1099-C for $100,000. At the same time, you had a capital loss of $100,000 which counter-weighs, in some respects, the income that you would have to include on your tax returns. This is a simplified scenario and you should always contact your accountant when analyzing your options, but it goes to show that simply saying that you might get stuck with a hefty tax bill if you short sell your home is misleading.

The next caveat that should be analyzed is the insolvency exemption which can be taken if the seller can show they’re insolvent. This is done by using Form 982. For the most part, people are short selling their home because they are in distress. A loss of a job or some other debilitating situation might have occurred. This could cause the homeowner to use all of their resources in order to keep the house. In this instance, which is very common, the homeowner might qualify for the exemption and should bring this up to their tax professional. Remember, previous tax years can be amended in order to take advantage of this exclusion.

Toni McAllister with the Lake Elsinore-Wildomar Patch is calling for the law to be extended again. She quotes C.A.R. President Don Faught as saying, “To heap an unfair tax bill on top of the pain and emotional duress of losing a home is unconscionable.” The state legislature is also considering a law, Senate Bill 30 in which it would extend California’s supplement to the federal law with regards to mortgage debt relief. This is all good and fine but there are other considerations with regard to the simplistic view people seem to have about claiming the forgiven debt as income, as I have outlined in this article.

My personal opinion on the matter is that as trust deed investors here at FK Capital Fund, when you lend money on any type of asset or even if it is unsecured, you are taking an investment risk. At the same time, the homeowner is also taking a risk by borrowing that money. Sometimes when you take an investment risk, you win or you lose and both parties suffer which means that even the issuance of a 1099-C should be abolished. This would force lenders to be more careful when lending and would result in a more secure financial system in the process.

Tuesday, April 23, 2013

Everyone working in real estate, buying real estate, or selling real estate has been commenting on the inventory shortage which has pushed prices upwards. Home prices in March edged up almost 12% higher than they were a year ago. The best advice that can be given is caution, especially for short term investors. I will cover the important aspects of that advice here.

Lack of Inventory
Do not buy a house just because it is the best property you can find. Too many investors are “settling” for properties because of the lack of inventory. This is a big mistake and will contribute to a new bust in the future. If you cannot find the right deal, do not jump into something that you’re not completely sure of.

Interest Rates
The low interest rates that have prevailed over the last 3 years will not last forever and slight increases will have a dramatic effect on prices and purchasing power. With current interest rates in the high 3% range, $1,000 could buy a $220,000+ property. In 2006, when interest rates were in the 6% range, that would only cover a $165,000 house. I foresee interest rates ticking up starting now, in an effort by the Federal Reserve to “slow down” the housing recovery.

Recovery Personal Credit and Increased Values
Buyers who went through a bankruptcy, a foreclosure, or a short sale are now getting back into the market which is putting more pressure on prices as demand increases. Here at FK Capital Fund, we are doing more loans than ever for borrowers who have had these problems in the past. The conventional market will follow and it will further heat up the housing market. Additionally, homeowners who have held out through the last several years with underwater properties are now able to sell their homes for ever-increasing prices.

Investors Have Made a Lot of Money
Part of the problem that led to the Great Depression was that regular non-investors were seeing the massive amounts of profits investors were making in the market. This made them want to participate. They were uninformed which distorted the market further and caused the eventual collapse. This is especially true now with “investors” calling us every day for loans that have never invested in anything before.

There are still quality investments to be made, but they should be made with an extra degree of caution.

Tuesday, April 16, 2013

The upturn in the real estate market has caused investors and fund managers to underwrite a little more cautiously, especially with talks concerning a new housing bubble already starting as seen here and here.

With the market languishing for so many years after the recession, underwriting a trust deed investment was simpler because it was hard to imagine prices could drop further.

Real estate prices in the Southern California market were already below cost. Though downward pressure on price was conceivable, the prices would eventually have to increase to the cost of building the property, at the very least. Thus, from an underwriting standpoint, it was much easier to analyze value and risk in a given trust deed investment.

Fast forward to today where we have had a 6% increase in home values nationwide, from February 2012 to February 2013. This makes the importance of analyzing true value more important than ever.

Investors are more numerous which has decreased annual yields and increased the maximum loan-to-value possible. These facts add to the risk of any potential investment. Less yield and higher loan-to-value makes the proposition less appetizing, but still a great investment if analyzed properly.

On top of that, these very same trust deed investors have expressed increased interest in the buying and selling of the real estate asset itself. This fact makes an investor even more willing to assume greater risk because they’re partially analyzing the transaction as if they might be purchasing the property themselves.

Overall, given the increased risk, private money financing is still readily available for quality transactions nationwide. Expect a more careful analysis of each potential transaction though. Knowing this can help borrowers and brokers alike in packaging their transaction for investor approval.